Up 42% This Year, What’s Next For Morgan Stanley Stock?

Morgan Stanley’s stock (NYSE: MS) gained about 42% year-to-date. This compares to rival Goldman Sachs stock (NYSE:GS), which has seen its stock gain about 55% year-to-date. So what are some of the trends driving MS stock higher?

Morgan Stanley’s financial performance has been solid. Over the third quarter, the company’s earnings surged 32% from a year ago to about $3.2 billion, revenues rose to $15.4 billion up from $13.3 billion in the year-ago quarter. While high interest rates led to an industry-wide slowdown two years ago due to higher borrowing costs, the Fed’s move to cut interest rates since September has encouraged companies to return to capital markets boosting investment banking revenues as well as equity and fixed-income underwriting activity. Separately, if you want upside with a smoother ride than an individual stock, consider the High Quality portfolio, which has outperformed the S&P, and clocked >91% returns since inception.

Morgan Stanley has been diversifying its business in recent years, increasing its exposure to money management, and away from investment banking and trading which see considerable cyclicality. This allows the company to have more steady revenue streams via recurring fees. Over Q3, total assets in Wealth and Investment Management divisions crossed $7.5 trillion driven by higher stock market valuations and rising inflows.  Wealth Management revenues rose 14% to $7.3 billion, with pre-tax income for the segment surging to a record $2.1 billion.

The increase in MS stock over the last 4-year period has been far from consistent and has largely been as volatile as the S&P 500. Returns for the stock were 47% in 2021, -10% in 2022, and 14% in 2023.
In contrast, the Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, is less volatile. And it has outperformed the S&P 500 each year over the same period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride as evident in HQ Portfolio performance metrics. So what’s the outlook like for the stock?

The election of Donald Trump to the U.S. presidency for a second term has brought some optimism around the financial sector at large. Investors are betting that the Trump administration’s focus on deregulation could translate into a more lenient approach to bank oversight versus the Biden administration. This could help banks boost their revenues, via higher deal volumes, lending activity, and potentially lower compliance costs which could boost profitability. Trump has also been in favor of tax cuts and this could also help the bottom lines of Morgan Stanley and its clients. Separately, the end of quantitative tightening by the U.S. Fed also helps Morgan Stanley, as higher liquidity in the system and lower financing costs could boost capital markets activity, asset valuations, and wealth management growth. Morgan Stanley has also indicated that it sees IPOs and M&A activity returning in the interim while noting that the size of the companies could potentially be larger.  We value MS stock at about $103 per share, which is below the market price. See our analysis of Morgan Stanley’s valuation for more details.

[1] Returns as of 12/17/2024
[2] Cumulative total returns since the end of 2016

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